Hedge Funds Suffer 3 Consecutive Quarters of Net Outflows

If the subject were recession, defined by the media as two or more consecutive quarters of decline, then one would correctly view the past three quarters of declining hedge fund assets under management as akin to a recession in the hedge fund industry.

However, economists can find no common ground for defining a recession. Obviously, the hedge fund industry is unlikely to accept that these outflows are indicative of a trend toward declining assets under management.

Continuing the recession analogy, consider the definition offered by the National Bureau of Economic Research (NBER). Apart from the array of usual suspects, that is, unemployment, manufacturing output, real income and wholesale-retail sales, the NBER’s Business Cycle Dating Committee defines a recession as the interval between peak business activity and minimal business activity. A rise in business activity subsequent to the nadir signals the end of the recession and the commencement of an expansionary phase.

Some Things to Consider

Defining a start date for the shrinkage in hedge fund assets under management is complicated by varying lead times for redemption. Redemption of invested capital may require a notice of from thirty days to one year—possibly longer! Moreover, hedge funds will typically retain up to ten percent of the original investment until it has completed its annual audit as a safeguard against any inaccuracies in monthly evaluations.

Given these realities, one can only conclude that an investor choosing to redeem has given considerable thought to his course of action. Clearly, hedge fund redemption has much more significance for an investor than simply exiting a stock position. For exactly this reason, redemptions must be viewed as ominous events. After all, redemptions of the magnitude proposed by MetLife, suggest its willingness to sideline as much as $120 million in capital, based on its redemption target of $1.2 billion. By any measure, this is a significant indicator of MetLife’s deep dissatisfaction with hedge funds. Of course, this does not mean they are making the right decision. That, only time will reveal.

Moving in the Right Direction

The hedge fund industry suffered first quarter 2016 net outflows of around $17.8 billion. These outflows were nearly halved in the second quarter, coming in at $8.2 billion. Fourth quarter 2015 net outflow was a paltry, in comparison, $1.2 billion.

Noteworthy is the fact that first-half 2016 redemptions must have been initiated in late 2015, when the only plausible reason for such action was performance. Although performance has improved, one cannot dismiss the possibility that significant redemptions may still be in the pipeline.

The BREXIT may have caused sufficient market uncertainty to persuade institutional investors to stand pat. Again, only time will tell.

As for Hedge Fund Jobs

It would be less than candid to suggest a rosy short-term outlook for hedge fund employment. However, worth recalling, is the fact that Citadel cut 12 employees from its roster in mid-February of this year, only to announce its hiring of 17 portfolio managers in the waning days of July. Once more, only time will tell what the impacts of these continued net outflows will be to hedge fund employment.